The Cost of a Law Firm Layoff: Multiply Senior Lawyer’s Salary by Five

Law firms are laying off lawyers with an eye toward cost savings. But Wharton management professor Peter Cappelli says there are also costs associated with a “brain drain” and they can amount to about five years’ salary for the layoff of just one senior lawyer.

Speaking in an interview with Knowledge@Wharton, Cappelli said that in a typical company, the conservative cost of turnover is close to a year’s salary. The cost is even higher when an employee is laid off, he said, because of exposure to liability and severance payments.

“So you are talking about, at a minimum, a year’s salary and in some organizations–in law firms, for example–I just saw a detailed analysis that said it’s like five years’ salary for a senior lawyer to leave because of the loss of clients and all [those related issues],” he said.

For companies that plan to rehire fairly quickly, “laying people off is just a nutty idea,” he said.

In the same interview, Morgan, Lewis & Bockius employment partner Philip Miscimarra said widespread layoffs typically lead to an uptick in litigation over the firings. But in the current downturn, severance and release agreements signed by laid-off employees are “operating as a fudge factor covering all kinds of imperfections that may have taken place in the process itself.”

“The broad-based acceptance of releases may actually prevent litigation from increasing in the current downturn the way it has in the past,” said Miscimarra, the managing director of Wharton’s Center for Human Resources research advisory group.